Stockholm (HedgeNordic) – No start-up can succeed without a great business idea. Beyond that, there are many factors and details determining whether the idea can be turned into a successful venture. For a hedge fund business, as much as any other business, the main ingredient of success lies in its concept, its investment strategy. Although many hedge fund start-ups are exceptionally skilled at investment strategy, setting up a fund, let alone a hedge fund, is not an easy undertaking.

“Emerging fund managers want to focus on their strategy and investors, but are often overwhelmed by the increasing regulatory complexity and structural matters,” Johan Björkholm, the deputy-CEO of Swedish fund hotel AIFM Group, discusses the challenges faced by fund start-ups. There are a lot of nuts and bolts that need tightened on the journey of building a fully operational and sustainable hedge fund business. “The laundry list of responsibilities for up-and-coming managers may seem intimidating, and can even deter some away from wanting to start their own fund business.”

“The fund hotel set-up can enable the emerging fund manager to truly focus on their core capabilities…”

While not necessarily providing a road map for certain success, fund hotels can provide the infrastructure needed to successfully launch and run a hedge fund start-up. “By seeking outside know-how and operational infrastructure, these professionals benefit from having a team “holding their hand” to ensure a structurally sound fund launch and to help navigate continual management once up and running,” says Björkholm. “The fund hotel set-up can enable the emerging fund manager to truly focus on their core capabilities while enlisting a “one-stop shop” to fulfill all obligational functional areas related to accounting, administration, compliance, risk, legal, etc.,” he elaborates.

AIFM has managed to build a completely customizable suite of solutions that covers everything one would need to set up and run a traditional fund, alternative fund or hedge fund, ranging from corporate services and guidance on how to create a suitable business structure to daily administration and risk management services. “It is very difficult to procure each of these individual functions if you have no experience to distinguish a solid service provider from a less experienced one,” explains Jared Fein, Fund Operations Specialist at AIFM. “Navigating these decisions takes time and manpower, and serve to distract from the most critical concerns – the investment strategy and capital raising.”

This fund hotel set up enables fund managers to leverage AIFM’s already-in-place operations infrastructure in the face of an ever-changing compliance and regulatory framework. “Running a fund can be overwhelming with all the systems needed, organizational requirements, and connections to the outside world such as distribution channels and investor reporting,” considers Björkholm. The fund launch-related challenges facing the next generations of fund managers are getting starker with the increasing legislative requirements and increasing barriers to entry. “AIFM provides the entire infrastructure needed to meet these requirements, making it almost as simple as pressing a button.”

“Rather than a “one size fits all” approach, AIFM offers customization that can fit the needs of any case.”

In the face of an ever-changing business environment and regulatory landscape, AIFM takes an open architecture approach to building a tailored ecosystem for each client. “Rather than a “one size fits all” approach, AIFM offers customization that can fit the needs of any case,” explains Fein. “This offering allows for the managers of the fund to cut out waste of services not needed as well as ability to use the core competencies of the manager and AIFM to build a strong relationship that can be expanded and contracted based upon need.”

OUTSOURCE OR DO EVERYTHING IN-HOUSE?

Nordic hedge fund managers, especially emerging managers, are increasingly turning to outsourcing various functions as a cost-effective alternative to building out expensive specialized internal teams and infrastructure. “I would find it hard to motivate the general risks but especially the costs related to finding and hiring the appropriate personnel to run a fully-fledged fund management business with all functions in-house,” argues Johan Björkholm. “Fund managers generally create value for investors in the actual fund management, not by running a fund management company.”

“Fund managers generally create value for investors in the actual fund management, not by running a fund management company.”

“No matter how much expected or committed capital there is at inception, establishing an organization that will manage one or more hedge funds entirely in-house can be an expensive and risky endeavor,” reckons Björkholm. As professional money managers, hedge fund managers are in the business of searching for and investing in attractive risk-reward opportunities. The same risk-reward concept can be applied in the decision-making process of building out a fund management business. “In my world, the risk-reward ratio should steer fund managers towards a fund hotel such as AIFM,” says Björkholm.

A PLATFORM FOR EVERYONE

AIFM services and collaborates with a wide range of strategies, with the types of strategies ranging from non-conventional asset classes such as physical art and Baltic forestry to more familiar asset classes such as equity, private equity and private debt. “By remaining neutral and operating on a case-by-case basis, we’re able to cater to any and all strategies,” he elaborates. “AIFM prides itself on being the only fund manager in Sweden with approval to manage according to all available investment strategies.”

“…alternative investment strategies such as hedge funds are gaining traction.”

The types of strategies launched by emerging managers reflect investor interest and demand in the prevailing market environment. “Investment strategies interest tends to follow market movements,” elaborates Björkholm. “We have gone from a lot of real estate-related requests, to mortgages, crypto currencies and tech,” he continues. “In the current market environment where it feels like almost all asset classes are depreciating, alternative investment strategies such as hedge funds are gaining traction.”

Hedge funds of all shades have struggled to keep up in the bull market during the decade of quantitative easing after the financial turmoil of 2008. “Following a strong stock market since the Great Financial Crisis, my view is that hedge funds have struggled with popularity,” reckons Björkholm. “But maybe it’s time for a hedge fund renaissance?” If that happens, fund hotels such as AIFM are ready to take on board all duties discharged by emerging fund managers, who can instead just focus on successfully running their investment strategies undistracted.

This article features in HedgeNordic’s “Powering Hedge Funds” publication.